Stock market risk is the risk that an investor assumes when investing in securities that trade on the stock market and that are issued by public corporations (companies that have many shareholders). Stock market risk can come in many forms. Rising interest rates and a rising inflation rate can increase stock market risk. A recession and economic contraction, where corporations will make less money, is another stock market risk. And, of course, there is individual public corporation stock market risk, where the individual company in question is not operating in good faith (an example would be Enron).

The stock market risk is high right now. Maybe you should take a vacation from investing.

As an investor, you should be aware that the six-month period from May to October has been historically the worst-performing months for stocks, according to the Stock Trader’s Almanac. And so far, this stock market risk and historical pattern appears to be staying true to form.

The charts continue to be bearish. I said this in March and in April. I had sensed some near-term topping action several weeks back, as the stock market risk intensified after several attempts to move higher failed to be sustainable. For instance, the S&P 500 at 1,400. Moreover, the lack of volume on up days has been a major red herring and stock market risk for the buy side—indicating a lack of mass market interest.

The key stock indices have been devoid of any momentum or signs of sustained buying interest—down in the red over the past five days and month.

And, while stocks continue to hold in positive territory for 2012, the key stock indices are in the red since the end of March below their respective 50-day moving averages. Technology stocks, which fared the best this year, had been up over 18% in March, but have seen gains dwindle down to just over 11% on higher stock market risk. The NASDAQ is down 6.11% since the end of the first quarter, only trailing the 6.27% market correction in the Russell 2000.

The overall Relative Strength is weak, indicating that more weakness may be in the works or the upside gains may be limited, but watch for some oversold buying support. The breach of the 50-day moving average was bearish and points to higher stock market risk. Continued weakness could trigger additional selling and drive the key stock indices to test their respective 200-day moving averages.

The underlying strength as indicated by the advance-decline line for both the NYSE and NASDAQ has been trending lower since the start of May—indicating a loss of momentum. The following chart of the NASDAQ Advance-Decline reflects the weakening position and stock market risk.

Chart courtesy of www.StockCharts.com

The fragility and stock market risk on the charts are deserved in my view.

China and the eurozone remain major areas of stock market risk, which I had previously discussed in Global Market Risk: Is it Improving?

It appears that Greece may fall out of the eurozone and euro, as I have said in my past commentaries. The reality is that Greece is a weak player and it will take decades likely for the country to pull out of its mess. In fact, it could even worsen if the tough austerity programs fail to deliver debt cuts and cost control. Germany, which is fighting its own GDP growth issues, is not interested in funding anymore funds to Greece and clearly wants to focus on its own economy.

And then there’s Spain with its rising bond yields. The 10-year auction showed yields of 6.22%, which are not sustainable for Spain and its troubled debt and muted growth. The high yields are an indication of potential problems down the road.

Italy 10-year bonds are yielding 5.75%.

Note the pattern here?

What about the eroding situation in China? While the new rich Chinese from the mainland flock into Hong Kong and buy expensive goods, China may be a time bomb.

Filings from Wind Information indicate that around 45% of China companies listed on the Shanghai and Shenzhen stock exchanges provided weak forecasts for the first half. In my view, this is a real and valid concern that needs to be monitored.

The warning signs are there as far as the stock market risk, but I hope it’s not the perfect storm!

With only two sessions remaining in January, the month delivered strong returns in the stock market. And, while the advance has been strong to begin the year, you might recall that a similar start in 2011 ended in a mixed trading year. While investor sentiment is bullish and breadth is positive, the lack of mass market participation is worrisome and opens up stocks to downside risk.

The charts of the key stock market indices remain strong, but only the blue-chip Dow Jones Industrial Average is showing a bullish golden cross, with the 50-day moving average (MA) above the 200-day MA. And, despite bullish near-term signals, the NASDAQ, S&P 500, and Russell 2000 are holding on to a death cross, in which the 50-day MA is below the 200-day MA.

A bullish event on the charts occurs after the key stock indices have peaked on three successive upward moves with lower peaks; stocks have broken higher and suggest more gains.

And, as I said, the light volume on up days is a red flag and indicates stock market risk. The end result is a bearish divergence forming between price and volume, adding to the stock market risk.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is speculation that the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets, wreaking havoc.

My advice is to ride the upward moves in the stock market, but make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.

The mining area continues to be positive in my view this year.

Metals are strong, with gold back above $1,700, while silver powered above $33.00. Copper also edged higher, hinting at an economic recovery, as the metal is used in many industrial applications and is often seen as a barometer on the global economies.

February Gold is at $1,725 and above its 50-day MA of $1,667 and 200-day MA of $1,642 on stronger Relative Strength. Gold is overbought, so look for selling pressure.

My advice to you is to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. In this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Buy gold and silver stocks on weakness. SPDR Gold Trust ETF (GLD) is worth a look.

I like silver as a trade, but strategist John Stephenson is extremely bullish and feels that silver is heading towards $50.00 an ounce based on a historical ratio to gold.

The March Silver is bullish and holding above $33.00. The contract is above its 50-day MA of $30.86, but below its 200-day MA of $35.79. The Relative Strength is strong, but there’s an overbought condition. Silver plays to take a look at include Endeavor Silver Corp. (NYSE/EXK), MAG Silver Corp. (AMEX/MVG), and Silvercorp Metals Inc. (NYSE/SVM).

On the energy front, increased optimism towards the global economies will drive up oil prices. The March WTI Oil is holding above the $100.00 level and at its 50-day MA of $99.45 and 200-day MA of $96.54. A bullish golden cross is holding, with the 50-day MA above the 200-day MA.

Whatever you are trading, the key is prudence and not over-committing to any one area in the stock market.

In the large-cap gold space, Newmont Mining Corporation (NYSE/NEM) is a steady performer; read about it in Newmont Mining: A Class Act in Gold.

As we just completed the December meeting of the Federal Reserve, the continued market sell-off accelerated. This was following the previous week’s European Summit, which was supposed to alleviate concerns about the eurozone. Neither the Fed nor the summit in Europe changed the market view that the situation is in crisis mode.

Many investors are left scratching their heads wondering how can all of the different investment sectors—stocks, oil, gold and so on—act the same in a market sell-off? The reason is that market participants, the big players, have become global behemoths. There is rarely a fund that doesn’t have its hands in international waters. This also applies to banks, which have gone beyond what most people think a bank does by just taking deposits and lending money. Now that same bank will take deposits and then leverage those assets into international investments to increase its rate of return.

Sounds great, so what’s the problem? A chain is as strong as its weakest link. Once that link breaks, the dominoes fall. If you’re a bank or fund with international investments due to a market view, you need to keep your books balanced. They’re supposed to do this by marking their portfolio with the current prices they can get if they liquidated their assets.

There are several issues with this inter-connected system. The first: it’s hard and almost impossible to know what price you can get for an asset if everyone else who holds that investment also wants to sell at the same time. The next problem: if one or more of your investments is going down in a market sell-off and you are over-leveraged, this will result in a margin call. This means either you sell your losing position, or raise money from selling another asset to put into the first trade. Either way, this creates more downward pressure on the entire system, regardless of your market view.

As more investments are tied together by global players, once one area starts crashing, it will force the funds and banks to sell off other assets. This creates a united market sell-off. This is how an avalanche starts. Everything is peaceful on the mountain when an event triggers snow to dislodge and start falling on other snow and ice, which continues in the same way until the slope flattens and it hits the bottom. Even though the snowflake on the top of the mountain is separate and different from one in the middle, they are connected.

In this sort of a situation, the market view may differ greatly from reality. Logic is frequently absent during a market sell-off. While scary, this also offers opportunities. Eventually, the avalanche is done and the mountain is peaceful yet again. Once the market view has deteriorated to such an extent that it’s overly pessimistic and devoid of rationality because of investors who are forced to sell from margin calls and who are desperate for cash, this is the time to step in and buy for the long term.

It’s a crazy trading environment out there. Whether you are in bank stocks, gold stocks, silver stocks, or even cyclical stocks, the stock market risk is high at this time, as we just completed a volatile week of trading.

The European debt crisis is keeping buyers on the sidelines and waiting for something magical to happen. The economic recovery is showing improvement here, but, with a high unemployment rate and declining home prices, it will continue to be a difficult path.

On the charts, the blue-chip Dow Jones Industrial Average breached below 12,000 and its 200-day moving average (MA) last Wednesday, but has managed to hold in positive territory for the year.

The NASDAQ and S&P 500 broke below their respective 200-day MAs and are back to the loss column. The S&P 500 is holding just above its 50-day MA of around 1,200.

The stock market risk is high especially since the charts continue to show a bearish “death cross,” with the 50-day MA below the 200-day MA. The stock indices need to hold at the critical 50-day MA; otherwise, there could be downside moves.

The light volume on up days is a red flag and indicates stock market risk. The buying has been associated with light volume, which does not support mass market participation. The end result is a bearish divergence forming between price and volume, and adds to the stock market risk.

An interesting fact is that the key stock indices have peaked on three successive upward moves, but the tops of the peak have been lower.

There is also stock market risk with the moving average convergence/divergence (MACD) indicator, which appears to be topping. The MACD on the NASDAQ looks the worst, with a minor sell signal emerging.

The NASDAQ could drift down towards the 2,400 level, which we last saw at the start of October, if sustained buying support fails to emerge.

In the commodities area, copper appears to have found some legs after its recent slide. Copper is playing off the prospects for the global economies after a bullish double bottom.

I continue to recommend adding some gold to your holdings as a counter to the stock market risk. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00 and we believe the spot price of gold could take a run at $2,000 in 2012 should the global economies and stock market risk continue.

Silver is a trading commodity based on the economic recovery and demand for electronics and industrial applications. A strong break above $35.00 would be positive and could drive a rally to around $40.00.

The December WTI Oil remains bullish—breaking above $100.00 on November 16 after data showed a decline in U.S. oil supplies. The problem is that higher oil means higher gasoline prices, which could ultimately impact consumer spending and the stock market risk.

Whatever you are trading, the key is prudence; do not over-commit to any one area.

Given the risk, make sure you are hedged via put options, which you can read about in Protect Your Money Made From the Rally (PC103111).

Do you want to play China-listed stocks with less risk? Read How to Play China with Less Risk

There was a stock market correction on Wednesday following a mini rally that drove some impressive upward gains in four of five sessions. I feel there is too much relaxation in the market, with traders ignoring the higher stock market risk.

Stocks dove on more uncertainties in Europe, specifically with the European debt issue continuing to drive the hourly trading here on the higher stock market risk.

We have discussed the financial mess in Greece. Now there is heightened concern about who will lead Italy after the pending resignation of Italian Prime Minister Silvio Berlusconi. Consider the fact that the yields on the 10-year Italian bond have surged to over seven percent. This may foreshadow more bad news to come. The speculation is that, when bond yields in the Greece, Portugal, and Ireland 10-year bonds surpassed seven percent; a bailout was triggered, as these countries did not have the ability and means to pay high yields. So now Italy appears to be in trouble, but I have talked about this quite often in my commentaries.

You need to be aware of the stock market risk at this stage. Yes, the recent upward moves in stocks were encouraging for the bulls, but you need to have your guard up.

The fact is that we have had an average earnings season and the debt situation in Europe remains problematic with Greece and the other PIGS countries. There are also domestic issues, namely jobs, housing, deficit, and the economic renewal, which add to the stock market risk.

I have talked about the technical analysis of the charts and the fact that a bearish death cross was still in place, despite the recent five-week rally. I’m cautious, as the trading volume has been relatively light on the four recent up days, which suggests a bearish divergence between price and volume. A death cross is when the 50-day moving average (MA) is below the 200-day MA, indicating high stock market risk.

While the key stock indices are holding at the 50-day MA, the DOW, S&P 500, and NASDAQ broke back below their respective 200-day MAs last Wednesday. With the decline, the S&P 500 fell back into the red for the year, while the NASDAQ is just barely holding on.

The key now is to be aware of the stock market risk.

I have suggested taking some profits off the table during the recent rally. At this stage, you should ride the gains, unless we see a chart reversal; but also make sure that you use put options or buy short-based ETFs as a hedge against the stock market risk.

Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), and IWM (Russell 2000). You can play an aggressive downward slide in technology via the Direxion Technology Bear 3X (TYP).

Be careful given the stock market risk and remember that maintaining your capital will allow you to trade longer-term.

Gold remains a favorite area of mine given the added risk, which you can read about in That Gold Chart’s No Fluke.

I continue to avoid European markets for obvious reasons (see A European Recession: Will There Be One?).